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Trading Psychology
Many of today's highly successful traders will tell you that
the general key to success in trading is to be able to comfortably take a loss.
It is general knowledge among experts in the trading psychology field and among traders that the
market is not predictable and it is safe to say that it never will be. In the
world of trading, it is expected to take a loss; even those who are highly
skilled traders know that it is inevitable. With that said, let us have a look
at things you as a trader should be aware of, how you can take a loss
effectively and use it towards the greater good of your trading world.
Trading psychology tells us that when a trader loses
he begins to become somewhat of a perfectionist in his dealing. Many traders
think that in trading, a good day will always be one that is profitable.
Trading psychology experts tells us this is not true. A trader should define a
good day as one where they have extensively researched and planned with
discipline and focus, and have followed through to the entire extent of the
plan. Yes, when a trader has mastered the art of accepting losses and working
through them with a well thought out plan then good days will become profitable
in time.
Because the art of trading in an unpredictable market
fluctuates so greatly from one day to the next, experts in trading psychology
believe that it is important that you concentrate on what you can control,
instead of things that are beyond your control. Looking into the short-term you
cannot expect to be able to control the profits of your trading. With that
said, look at what you do you have ability to control.
You do have the ability to control the difference between
good and bad days. You are able to control this factor by extensively
researching the strategies you implement within your trading experiences. By
learning to research your chosen strategies, thus controlling the amount of
good and bad trading days you experience, you will, in the long-term begin to
generate profits, which is the ultimate goal of every trader.
Trading psychology experts tell us that it is
important to become realistic in trading instead of becoming a perfectionist.
Perfectionist traders, relate a loss with failure, and will become obsessed
with the failure, focusing only upon it. Realistic traders understand the
unpredictability of the market and taking a loss is simply part of the art. The
main key you must remember in trading psychology to be able to effectively
limit your losses, instead of becoming obsessed with them. A common thing seen
within the trading psychology world is that traders who are obsessed with their
losses often have a hard time bouncing back from them, thus losing in the end.
Experts in trading
psychology have organized three basic strategies you can use to
effectively stop losses. These strategies are:
* Price Based * Time Based * Indicator Based
Stops that are priced
based are generally used when the other two have not
functioned. To make this work you will need to make hypothesis's
about the trade and identify a low point in that particular market. Then you
will set your trade entries near your points, thus making sure that losses will
not be overly excessive if the hypothesis fails.
Time Based stops constitutes making use of your time.
Designate a holding period you allow to capture a certain number of points. If
you have no achieved your desired profit within that time limit, you should
stop the trade. If effectively used you should stop even if the price stop
limit has not been achieved.
The Indicator based
stop makes use of market indicators. As a trader, you should be
aware of these indicators and utilize them extensively within your trading
experiences. Look at indicators such as, volume, advances, declines, and new
highs and lows.
Experts in trading psychology say that setting stops and
rehearsing them mentally is a good psychological tool to use and will help
ensure that you follow through.
by Tim Renolds
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